What do Haiti, Indonesia, Chili, and subprime mortgages have in common?
You Remember FNMAE and Freddie Mac; they were established to protect us, to attract mortgage capital, and to provide securitization. So what do Haiti, Indonesia, Chili, and subprime have in common? The ground quaked, homes were left in ruin, the cleanup will take decades, thousands of casualties resulted, and the scars will be there for generations.
What do 1912, 1938, and 1970 have in common? Those were the years that Titanic One, Two, and Three were launched. I know, you’re thinking that there was only one Titanic, right? Well Fannie Mae was launched as a part of the New Deal to create stability in and to prevent the collapse of the real estate market that we experienced in the Great Depression. That was a titanic mission. LBJ privatized Fannie in 1968 creating a (GSE) or Government Sponsored Enterprise. No taxes, a monopolistic grip on the mortgage market, and no SEC scrutiny. Are the capitalists in the audience drooling yet? In 1970 Freddie Mac, a second GSE was launched. Their combined assets (a large portion of which are poisoned) exceed 1.6 trillion dollars. I have no idea how much that is, but I know it is a titanic number. Let’s hope that 1938, 1968, and 1970 do not become dates that also “will go down in Infamy.” A glance at their combined balance sheets reflects that they have an identical sum for liabilities and stockholder’s equity. The liabilities are real and growing with the foreclosure rate; the stockholder’s equity, well we might as well move that up into the liabilities. In essence, they are under water.
If you follow the debate and the logic (assuming that the new logic is any better than the old logic), Barney Frank and others want to dissolve them both and reassemble the parts. I’m beginning to wonder, “Who’s on first?” There is no question that FNMAE and Freddie were leaders and helped pave the way for a broader and more diverse home ownership in America - that was their role. They have done many good things for the economy and for the individual mortgage holder by helping to create and securitize a secondary market for mortgages and for providing liquidity in the mortgage market. Too bad that their stake in a calamity that they were established to prevent has caused them to outlive their usefulness.
Fannie’s mission appears to be undergoing an internal change from “… ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates” to “… enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers.” This is a subtle or not so subtle shift in philosophy depending on your viewpoint. After tapping the treasury ultimately for $380 billion to cover the losses and clean up, they have little confidence left to inspire and from the indicators it won’t be enough to right the ship. It is most unfortunate that the collective hubris of those who laid the shaky foundation for subprime lending will go largely unpunished. They will be permitted to enjoy their millions in luxury while millions of families toil in the aftermath.
It may be impossible to make the conflicting goals of a GSE and a government takeover work. Fannie and Freddie are not able to attract new capital and the confidence they were to provide has drained as rapidly as has the Treasury. They can only tread water and act as a conduit for federal money. That party is over. With 1) what mechanism do we replace Fannie, and 2) what can be done with their “poisoned assets”? There are potentially several million more seriously delinquent or troubled mortgages in the shadow inventory of foreclosures that will work their way through the system? A social issue requires money, creative thinking, and solutions that don’t come off the shelf.
The question is how to manage the poisoned assets and the lives of thousands of Americans that have been affected. It’s time for some magic, and nothing short of some wizardry will do. Merlin, are you watching? Do you have any suggestions?
Permit me to take a look at the contents inside the box from the outside. Let’s see, we have delinquent mortgages, foreclosures, unemployment, a new category of functionally homeless, tight credit markets, two expensive and ongoing wars, bipartisan politics as strong as we have ever seen it, failed Fannie and Freddie, a budget and national debt that is completely off the charts and a new and controversial health care plan. Can it get much better? In the corner of the box, I found obesity, and just could not ignore it. How can these pieces be fit together to create a solution to this conundrum? That is way too much to take on. Let me pull out a few of the pieces and see if they fit.
We need to start with a small, flexible solution, one that includes the elements that will allow it to succeed and not program it for future failure. Let’s select some of the pieces and consider a possible solution for them. OK, let’s take out a neighborhood with a large number of foreclosures, mostly now poisoned assets, a group of functionally homeless families, and some unemployment. If we can successfully turn these negatives into a productive and workable solution, it will make a difference.
There are neighborhoods with as many foreclosures as occupied housing units. There are families that cannot afford more than a minimal amount for a mortgage or rent. Prospects for adequate housing for them are often dire. There are lenders looking for ways to move these liabilities to the asset column. If there is no pride of ownership accompanying the solution, it won’t remain a solution for very long. We need more permanent and positive outcomes.
First, let’s inventory the needs of the individuals and families that have been affected by foreclosure and the troubled economy. Without addressing these, a simple financing plan or subsidy program will not work. Some of the more pressing ones are:
- Shelter and pride of ownership
- Education or training
- Basic health care
- Food and clean water
- Schools for students
- Fundamental family environments for social stability
- Hope for the future
Now, take a look at the poisoned assets and identify needs as we see them:
- Paying mortgages or the equivalent
- Revitalized neighborhoods preserving property value
- Shift from the liability column to the asset column
- A growing and not deteriorating tax base
Before we look at a possible solution, keep an old axiom about neighborhoods in mind, because it will have to change. NIMBY! Not in my back yard! Successes with the program will be the best potion for this. This is important because it is in the roots of a solution. Keep also in mind that the needs stated above are relative, and the amount and type of assistance will vary. Even with the variances, these needs are relative. This solution takes into consideration those families that have become functionally homeless.
Qualify and move families into these homes, provide them with the basic materials to make repairs and hire those with skills to do the more technical jobs. Allow them to pay whatever they can for a mortgage payment. Even though it will fall well short of the mortgage, it will be better than the alternatives. Mortgages could be structured so that periodically (perhaps every two or three years) they would be reevaluated by a neutral party to determine if the mortgage payments could be increased. Pride of ownership can return dignity and in turn, a well kept neighborhood. The solution does not end here, that would only create a stopgap.
The other needs have to be addressed for a sustainable outcome. These families will need basic affordable health care (sound familiar), jobs, training, schools for their children, food, clean water, and services. The byproduct could also revitalize core family values. Without these elements, there is little effective supervision for children. Family values have been disrupted by multiple careers, unemployment, excessive debt, and unsatisfied needs. Families that don’t take meals together and interact during those times begin to lose the ties that hold them together. Many families have lost the core values and connection that a healthy home environment fosters. Reunite family values and the pride of ownership, and the solution is one step closer.
Smaller clinics where patients can be treated for minor problems can be a viable part of an overall health care plan. Emergency rooms would not be as big a part of primary care. These clinics would not only take on much of the routine health care, but they would also create a career path for nurse practitioners and medical technicians that could treat things that do not require a physician.
With the obesity issue facing our nation, here is a great place to reintroduce healthy eating habits. Teach the families, the adults, and the children how to cook healthy meals. This in itself will improve health. The high fat, high carbohydrate, high sugar, and high sodium diets are endemic. This can also create jobs for some of the individuals within these neighborhoods.
Introduce some opportunities for jobs. Work with companies that have shipped jobs overseas because it is cheaper. Communities and states provide incentives to attract prospective employers. Why not encourage and incentivize employers to repatriate those jobs and to make it worth their while to provide the training. Some of this can be achieved through working the existing high schools, community colleges, and universities.
There are existing federal, state, and local programs that could oversee and help with these solutions, and there are private organizations that can assist. Habitat for Humanity and the Salvation Army, civic and religious groups among others would probably be delighted to take a hand.
How is this plan to be administered and what oversight or monitoring should be implemented? A key element, I think, is to have “someone” take responsibility. Yes, someone, not some bureau or department that will institutionalize the process. A neighborhood champion or program director that is – part ombudsman, part friend, part disciplinarian and committed to the plan. This should be someone that is close enough to the source to understand what goes on and can keep a watchful eye on the progress. They can be empowered to seek whatever assistance or resources that are available to make things work. The neighborhood can do a lot of self help, and this should be organized.
If this solution can be made to work, it can be replicated in other communities. Don’t think in terms of a cookie cutter plan. There would be a learning curve and a lot of changes along the way. A success here would also maintain the tax base and property values would not continue to deteriorate. Many of these neighborhoods are doomed to become slums or worse without a plan to preserve them.
The plan is not perfect, and it is not complete; however, the idea is there. If you like any of this—present it to your congressional representative, council member, governor or to anyone in a position to make it happen. What can be lost that is not already in greater jeopardy if left unattended? Yes, there would be a lot of work, and the gratification would come in the form of reunited families, revitalized neighborhoods and hope for many who have lost it along with their 401 (k) plans.
Footnote: If these foreclosures are not recycled in sustainable ways, many neighborhoods will become slums, the government will become the largest landlord in the nation (who wants that), the tax base of communities, cities, states and the federal government will erode, and with it, the underlying wealth of our nation will be washed away. It is a gloomy prospect, but who would have imagined the massive bail out and federally assisted programs that we have seen just over the past few years. We have no choice but to find viable solutions. We cannot ignore the details and the basic hierarchy of these needs. Solutions need to go down to the grass roots of the lawns and rebuilt from there. The devil is in the details and if we ignore them, the devil will prevail. Thanks for taking the time and having the interest to read this. If most of us care and enough of us act, we can make a difference.